One Bio (PINK:ONBI)

In our quest to identify promising Chinese firms, the GeoTeam discovered a few agriculture and organic products companies, such as China Green Agriculture (NYSE AMEX:CGA) and China Agritech Inc (NASDAQ:CAGC), that have provided us with handsome rewards.

We have stumbled upon another firm in this space - One Bio Technologies, Inc. (OTC BB:ONBI). The Company’s Introduction into the U.S. capital markets was the result of a reverse merger transaction in June of 2009. One Bio’s goal is to create a vertically integrated company by acquiring Chinese firms operating in the “green” industry, one of the fastest growing sectors in Asia. The Company is targeting China because of the country’s favorable economic growth profile.

Understanding One Bio

The Company embarked on its business model by acquiring two Chinese firms that supply customers with raw material for use in the production of fertilizer, supplements and organic food.

The Company’s Chemical and Herbal Extracts (CHE) unit was established through the acquisition of an 83 % interest in Green Planet Bioengineering, Co., Ltd.  Green Planet, in existence since April 2004, consists of two divisions that produce chemical and herbal extracts for use in a wide range of health & wellness and organic fertilizer products.

For example, One Bio produces chemical extracts, from the tobacco leaf, used by its customers to make Coenzyme Q10. The Company is very excited about the Coenzyme Q10 line which is speculated to have benefits when dealing with issues of cardiac arrest, blood pressure, migraine headaches and longevity of life.

One Bio’s Organic Products (OP) unit was established through the acquisition of an 84% interest in Jianou Lujian Foodstuff Co., Ltd. (“UGTI”). UGTI, in existence since September 2002, develops products and extracts derived from bamboo that are used by its customers to produce food, health and agriculture products. One Voice currently holds over 16,000 acres of organically certified bamboo land and 6,000 acres of vegetable land. UGTI is the third largest bamboo producer in China.

The company has a third operating unit which acts as an internal finance arm ready, able and dedicated to fund and facilitate the growth of One Voice’s core bioengineering business.

One Bio feels that it is poised for further internal and external growth, especially if it is able to raise capital that will be used for specific expansion goals:

• The Company intends to upgrade its facilities in order to increase raw material production. The CHE subsidiary could then purchase more tobacco leaves and produce more extract. For example, its OP subsidiary is currently operating at 100% capacity, but is only utilizing a portion of its 16,000 acres available for bamboo.
• The Company would like to become less of a wholesaler and create propriety products, through both of its subsidiaries, to sell directly to the end user. To accomplish this task, One Bio must establish manufacturing capabilities. This is expected to have an eventual positive effect on sales and margins.
• The addition of production and manufacturing facilities will enable One Voice to purchase more land and pump out more products.
• One Bio plans to add to its customer base by developing an extensive distribution network.
• The ultimate goals are to develop and add more product lines as well expand geographically.

One Bio intends to partly accomplish its tasks through a vertical acquisition strategy that it hopes to implement by mid 2010. In the meantime the Company feels it can continue to grow EPS at a respectable 20% rate. Finding attractive acquisition targets should be achievable in a market that is fragmented, filled with entrepreneurs operating profitable businesses with limited financial resources.

Financial Snap Shot:

Proforma Income Statement Highlights:

Notes: No Long Term Debt, $6.8 million Short-Term Note/Loans, $9.7 in Working Capital, Cash Flow positive

We will have more information on Company financials after the filing of third quarter results.

The GeoTeam® is excited to follow the One Bio story. It is targeting markets that are in their infancy and supported by government “green” initiatives. Its vertical integration strategy should enable the company to expand its product depth and margins, as well as its geographic presence outside the 15 provinces it reaches domestically in China and other Asian and European markets it now covers.

We are also excited that the Company has United States head quarters with an American influenced management team.

Given One Bio’s low valuation we are coding it as a GeoSpecial. With a forward implied EPS of $0.33 (based on Company net income guidance), the Company is trading at a P/E ratio of 15 with a PEG ratio of 0.68. We are also placing the stock on the GeoBargain on the radar list in anticipation of the execution of its 2010 strategy after which time we would be more comfortable speculating that consistent 30% EPS growth is achievable.

The Company’s industry counterparts are comparables such as China Green Agriculture (NYSE AMEX:CGA), American Oriental Bioengineering (NYSE:AOB) China-Biotics Inc (NASDAQ:CHBT) and China Sky One Medical (NASDAQ:CSKI)

Risks Considerations:

• 8% of the Company’s revenue comes from two customers
• Future EPS growth is dependent on the completion of acquisitions with favorable         financing terms.
• Access to capital could be limited.
• Dilution is always a risk that can accompany an acquisition strategy, although One Voice seems very keen on maximizing shareholder value and earnings accretion.

We have posed the following questions to management:

Q - What are the terms of your 2,287,917.00 loan receivable amount?

A - These are third party client loans we made to facilitate the trade of our products and fund expansion. These are being paid within 45 to 60 days on average. It is similar to accounts receivable but since it is funded through our internal financing arm classified as loans receivable.

Q - Are you satisfied with a 98 DSO account receivables position?

A - Chinese payment terms are traditionally longer than the 30 to 60 days terms offered in North America. Our relationships are long term in nature and to date bad debt has not been an issue. We are comfortable with our AR collection cycle at this time.

Q - What is your cash flow from operations thus far in 2009?

A - Will defer the answer for a few days until our Q3 numbers come out.

Q - Can you please outline your return on capital goals as it pertains to pre-tax income? (i.e. $1.00 of capital spent = how much of desired income.)

A - We work with a 14 months rate of return for acquisitions on the cash deployed and an 18 months rate of return on cash deployed for organic growth.

Q - Can you please define the desired characteristics of acquisition targets?

A - Target companies must have the following criteria:

1. Fast growing, cash flow positive leaders in industries where existing management has a history of profitable operating experience in the region complimented by a clear plan for growth;
2. Bioengineering companies with proprietary technology;
3. Repeatable and sustainable revenue streams;
4. High barriers to entry; and
5. Synergies with ONE Bio’s current operating units, including but not limited to:
   • Increased product diversification;
   • Ability to further vertically integrate our current offering (from ray material cultivation, extraction to the delivery of over the counter end user products);
   • Increased production capacity; and
   • Extended distribution network.

Q - Can you provide ProForma annual sales and EPS numbers for 2007?

A - Will have in a few days

Q - Can you provide past and expected growth rates for your industry?

A - We operate in a niche where competitors are small particularly in the Asia pacific, China market. There are various opportunities to consolidate our industry and gain scale. Our historical growth rate has ranged between 20 to 30% per annum. We anticipate said growth rate to accelerate as we execute on our acquisition and organic growth strategy. Our growth rate exceeds our industry growth rate but may not be a relevant comparison when the industry is controlled by larger players in the western world.

Q - What is the current significance of your 6,000 acres of vegetable land?

A - The combination of our Bamboo land and vegetable land allows us to deliver a wider variety of organic products thus increases our competitive advantage. We are currently the 3rd largest producer of organic foods based on bamboo in China and the only one in China to have gained food safety certifications from China (HACCP), Japan (JAS) and Europe (ESFA).

Q - How much of your 16k bamboo acres are you utilizing?

A - 60%

Q - Do you outsource all of your production/manufacturing?

A - All or production and/or manufacturing is done in house with facilities owned by ONE and its operating subsidiaries.